Equity Premium in Indonesian Capital Market: Sectoral Systematic Risk

Abstract

The risk premium, or the difference between the expected returns on stocks and on risk free assets, has commanded the attention of both professional economists and investment practitioners for decades. It is not surprising that the magnitude of interest in premium is intense because of its critical role for asset allocation and wealth projections for individual investors. This research aims to generate and analyse the impact of risk premium calculation or the beta coefficient of each sector’s risk premium in Jakarta Composite Index. The research focuses on providing new perspective in assessing the level of risk premium in equity market, sector market to be precise. Using CAPM model with historical data on stocks return and sector index return, the level of risk premium on each sector is generated using panel data method. The result of this paper widens the variety of research related with risk premium in Indonesian capital market and gives more focus on sector implication. This research also gives suggestions regarding equity management for investors, government policies, and the equity issuer by providing sector risk premium for the major stakeholders in Indonesian equity market.

Keywords: Jakarta composite index, risk premium, sector risk premium, CAPM, risk, return.

Australian Academy of Accounting and Finance Review, vol 1, issue 2, October 2015, page 148-159